Lack of pipelines, not carbon tax, hurting Western Canadian oil and gas competitiveness

Alberta well has $770,000 in policy-induced costs, about same as oil well in Saskatchewan

February 1, 2018 – Government policies are piling on to reduce the competitiveness of energy producers in Western Canada, according to a new report from the C.D. Howe Institute.

In the first edition of the annual policy report card for the energy sector, “Death by a Thousand Cuts? Western Canada’s Oil and Natural Gas Policy Competitiveness Scorecard,” author Benjamin Dachis performs an apples-to-apples comparison of the policy-induced costs on natural gas and conventional oil producers in Canada and the United States.

“Canadian energy producers are at a competitive disadvantage relative to producers in the United States. Much attention has been paid to carbon taxes, but a lack of market access for oil and taxes on investment – not emissions prices – are the main policy-induced competitiveness problems for conventional energy producers in Western Canada,” said Dachis.

Dachis’ analysis takes the cost and productivity characteristics of an average oil well and an average natural gas well along the Alberta border with British Columbia and uses them as “reference wells” to estimate the cost of policies elsewhere for the same hypothetical well.

The study takes into account policy-induced costs, including lack of market access, taxes on investment and royalties, property and municipal taxes, and carbon pricing costs.

The major findings of the report include:

Pipeline constraints have greatly reduced the price that oil producers receive. This effect is by far the largest competitiveness cost on energy producers;

Corporate taxes and provincial royalties are major policy costs for producers. Canadian provinces have historically been competitive with the US on taxes, but recent changes in the US highlight the need to examine the cost of taxation. The outcome of Alberta’s recent royalty review was a step in the right direction;

Greenhouse gas emission taxes have, so far, not been major competitiveness costs for energy producers. Further, the Alberta (and similar Federal) system gives companies a strong incentive to reduce their emissions with little competitiveness cost. Indeed, companies with below-average emissions are better off under the current system; and

Property and municipal taxes have enormous variation across Canada and the US. There is room for provinces to reduce the cost of both provincial and municipal property taxes on energy producers. In Canada, producers in Alberta face the highest local tax burden. In North Dakota and Pennsylvania, local governments are not allowed to levy property taxes on oil and gas production.

Overall, an average oil well in Alberta encountered around $770,000 in policy-induced costs, about the same as what a similar oil well would face in Saskatchewan, while wells in US states faced less than half such costs.

“Policymakers now need to take steps to ensure that approved new pipelines get built and to reduce the burden of corporate income, royalties, and property taxes, especially in light of recent US tax reforms,” says Dachis.